MUMBAI: No other central banker in the world has thrown so many pleasant surprises and rude shocks at investors as the Reserve Bank of India's (RBI) Duvvuri Subbarao in the past 18 months.

The career bureaucrat had not heeded markets when they wanted a rate cut, but has proved unexpectedly munificent on occasions when the markets least expected it. When the RBI's technical advisory committee called for a pause, he cut rates; when it wanted a cut, he raised them.

As Subbarao prepares to deliver the first monetary policy review of the new financial year, economists, traders and investors are torn between desire and a sense of foreboding. Many want rates to be cut and the cash reserve ratio to be slashed, but fear that it may not happen after April's unexpected 50-basis-point reduction. A basis point is 0.01 percentage point.

Predicting Subbarao's action has become more like guessing the outcome of a coin toss than a scientific forecast based on events and statistics. But that's the problem Reserve Bank governor himself faces given the global and domestic economic scene after two decades of great moderation. The quality of data, which he had termed 'analytically bewildering', adds to his woes.

Subbarao's comment last week sums up his predicament. "While Dr Reddy had problems of success, like excess flow of liquidity into the country, I have a problem of problems," he said. YV Reddy, his predecessor, contemplated curbs on dollar inflows while Subbarao is faced with the prospect of luring US dollars into the country.

When he announces the mid-quarter macroeconomic review on Monday, the RBI governor will be factoring in a view that was just a murmur a few months ago but is getting louder now - stagflation, a state of low growth and rising prices. India may be the first major economy that may face such a state, economists dread.

A European crisis could cause liquidity crunch in the financial system, but the RBI has plans for swap lines with other central banks for flow of US dollars. Ironically, however, the crisis may be the only silver lining for India if commodity prices, including crude, crash.

"The RBI could still argue that growth risks have worsened since the last policy meeting, uncertainty about the external environment (particularly euro zone) has risen, and global oil prices have fallen considerably," says Taimur Baig, economist at Deutsche Bank, who has forecast a 25-basis-point repo rate cut and 50-basis-point CRR cut. "We are predicting the above not because we think this would be the right thing to do, but because we think the central bank will be pressured into doing this."

The benchmark repo rate, the rate at which the RBI lends to banks, will be lowered by 25 basis points to 7.75%, according to 17 of the 23 economists polled by Bloomberg. Two expect a half-point cut to 7.5%, with four predicting no change.

State Bank of India Chairman Pratip Chaudhuri is also calling for a percentage point cut in the cash reserve ratio requirement to 3.75% for lower market rates. "We will cut base rate if RBI cuts CRR," says the head of the country's biggest lender. "Co-relation between repo and interest rate cut is rather weak."

What used to be a formulaic approach to monetary policy is more complicated now. Banks were hammered into lowering lending rates when they initially declined after the last cut in April, citing market conditions. It has worsened since.

Deposit growth is at a seven-year low at about 14% while loan demand is near-18%. The so-called credit-to-deposit ratio is at 77%, implying Rs 77 is lent against every Rs 100 deposit, limiting banks' ability to lower deposit rates. Banks are also mandated to hold Rs 24 of every Rs 100 deposit in government bonds. Banks are borrowing Rs 1 lakh crore from the RBI to meet the shortfall, which is substantially higher than what the central bank is comfortable with.

"When inflation expectations and current account deficit are at a persistently high level, quick monetary easing would compound the problem with currency depreciation pressures," says Upasana Chachra at Morgan Stanley. "For an effective reduction in cost of capital, India would need a cut in public expenditure (fiscal deficit), which helps reduce consumption and increase savings."

The euro crisis could throw up another problem for Subbarao. With all central banks in the developed world ready with liquidity-enhancing measures, the world will be flooded with more currency. That has the potential to reverse the commodity price fall and fuel inflationary pressures.

"RBI is in a sticky situation," says Nupur Mitra, chairman and managing director at Dena Bank. "Inflation is not under control and the economy needs to be propped up. But one has to ask if it is entirely RBI's job to do that. So I think, RBI should keep the rates unchanged."

The governor himself has provided enough indications of a rate cut and a pause. He has also declared he won't hesitate to raise rates if prices begin to shoot up.

"The communication we try to give and the message we try to convey is that this short-term sacrifice of growth is a small price to pay for bringing inflation down so that in the medium-term the growth is secured," Subbarao said last week.

Does that indicate that he will shock investors with a pause today? "Don't focus on what the central bankers say, focus on what they do," Hitendra Dave, managing director and head of global markets at HSBC.